Friday, August 21, 2015

Cramer: Worst mistake you can make in a selloff

Cramer: Worst mistake you can make in a selloff

Jim Cramer guides investors on why selloffs occur and why sometimes they just don't make sense. Avoid this common mistake!
CNBC
Fri, Aug 21, 2015, 8:34pm EDT - US Markets are closed
"The pundits and commentators say it's too hard, that ordinary people can't invest for themselves and shouldn't even bother trying, but I know from experience...that you can do it as long as you're willing to put in the time and effort," Cramer said.
After all, the "Mad Money" host does have hands-on experience running a $500 million hedge fund for 14 years, with a return of 24 percent after fees. Thus, he also knows that being a good investor means knowing how the market works behind the scenes.
One of the worst myths out there is that the market is always rational and makes sense. Cramer knows this is not true; on any given day the market can be totally wacky for reasons that do not make sense. Sometimes stocks go up when they should have gone down, and sometimes entire sectors move for ridiculous reasons.
"Never assume that just because something happened, it has to make sense because the market is always supposed to make sense. That's nonsense," Cramer added. (Tweet This)




It is important to be able to look at some of the crazy moves and understand that the stock moves are just nuts. Because once you start cooking up connections where none exist-Cramer says that is where you are really in trouble, because you can make yourself believe just about anything.
So, what are some of the crazy catalysts that move stocks?
NASDAQFri, Aug 21, 2015 4:00 PM EDT
More
They are all reasons that have nothing to do with the underlying prospects of actual companies. When that happens, Cramer recommends taking advantage of that irrationality, not to buy into it by chasing stocks or panicking out of them.
"Remember, nobody ever made a dime panicking," the "Mad Money" host said. (Tweet This)
For instance, sometimes the market is hit with a huge pullback and a lot of stocks go down even though it has nothing to do with fundamentals of the company. Hedge funds that are in trouble will start selling to raise money to pay back unhappy clients who are demanding money.
Or sometimes there is a red-hot deal, like a Facebook (FB) or Alibaba (BABA), which is so massive that the mutual funds have to sell stocks in order to raise cash to get in on the deal. It's crazy, but mutual funds don't keep cash on hand to make these kinds of investments. That means they don't have enough cash to participate in these big deals unless they sell stocks they own.
But regular investors will see the selling and start to panic, dumping stocks in turn. Ultimately, this will trigger a selloff, and the media will try to cook up reasons all over the place to explain why otherwise stable stocks went down.
It can happen to commodities, too. Cramer saw it first hand when oil ran up to $147 a barrel in 2008, even as demand for petroleum was stable to weaker, which should have caused oil to go lower. Only after that insane rally did he find out that oil skyrocketed because a couple of hedge funds had bet against oil, and had to buy in their shorts at insanely high prices. Sure enough after that huge run, oil fell straight back down to $33 a barrel as hedge funds sold it off to raise cash.
Read more from Mad Money with Jim Cramer
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"The worst mistake, the most common mistake you can make these days, is to say that because a particular stock or commodity trades at a given level, it therefore deserves to trade there. Often, that is just fiction now," Cramer said.
So, when everything in the market or in a particular sector goes down, instead of assuming that the issue pertains to the fundamentals of the underlying company, Cramer suggested to ask yourself if it could have been caused by an out of control hedge fund or Wall Street money management. Then realize that the market's irrationality can be your opportunity to profit.
Questions for Cramer?
Call Cramer: 1-800-743-CNBC
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Cramer: Worst mistake you can make in a selloff


 
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